How Does The Renovation Loan Process Work?

The renovation loan process is very similar to the process of a standard purchase or refinance transaction. But, unlike the purchase of an existing home, a renovation loan involves determining the value of the home that is not yet improved. To assist the appraiser and the lender in determining the future value of the home, information must be provided on the planned repairs and renovations, what materials will be used and the total costs to complete the renovation project.

Additionally, Loan Shark Funding will evaluate your experience or the contractor who will oversee the work to ensure that he or she has the experience and expertise needed to complete the proposed improvements.

For most renovation loans, the following documentation is generally required in addition to the standard credit documentation collected by your lender. A list of documentation to fit your specific needs will be provided to you.

Final Plan and Specs

Construction Contract

Detailed Specification of Repairs

Renovation Budget

Contractor Questionnaire

Various Forms

There are a number of costs involved in rehabilitating a home. A description of each is contained below.

Soft Costs. Permit fees, engineering fees, architectural fees, inspection fees and other costs associated with rehabilitating the home that are not directly a part of labor or materials. Many times you may have already paid some of these costs upfront. If so, these paid items may be considered as "equity" if you can document the cost with a bill and a canceled check or paid receipt.

Hard Costs. The actual cost of the renovation covering all labor and materials associated with the project. Typically, you will enter into a contract with a general contractor or professional remodeler to complete the rehabilitation. This contract will set forth the work to be done and costs associated with the proposed project.

Closing Costs. These are costs associated with the closing of the loan, such as title costs, loan fees, discount fees and appraisals.

Contingency Reserve. A reserve account set aside to cover unforeseen cost overruns in the renovation of the home. In most cases, lenders will require a 10% contingency account be established. Depending on the complexity of the proposed project or the ability of upfront inspections to determine the condition of mechanical systems, the contingency reserve may be 15% or 20%.

Payment Reserve. Depending on your loan program and the habitability of your home during renovation, your lender may include payment reserves which are set aside at loan closing. This account is established to make the monthly mortgage payment during the renovation period, so you don’t have to pay out-of-pocket during the rehab process if you are displaced from your home.

Home Price or Current Mortgage. If you own the home, then the current mortgage balance will be included in the total cost of the project to be financed. If you are purchasing a new home, then the purchase price is included in the cost.

Maximum Loan Amount. The maximum loan amount is based on total project costs, and is determined by loan guideline limits. In some cases, the loan amount will be derived by the minimum equity amount. In other situations, the maximum loan amount is established by loan-to-value (LTV) limits. For further clarification, please consult with your loan officer.How Do I Get My Funds From My Renovation Loan?Disbursements are made on a reimbursement basis. You should immediately begin work. Disbursements will occur over the course of the project as requested by the contractor. The number of the disbursements will be established upfront, usually ranging from 3-5. The contractor must submit draw requests online and you'll be automatically notified via email. Upon receipt, we will request a progress inspection, title update, and lien release to complete the disbursement process and have funds issued to you and your contractor. Initial Disbursement. The initial disbursement at closing typically includes: the payoff (for refinances) and related closing costs. We discourages any funds being issued to the contractor at loan settlement. Hard Costs. The costs for labor and material are disbursed based on the percentage of completion at each draw request.